pension maturity what to do....

[Guest JudgeMental]

I am 60 had to retire due to healt 3 years a and my pension with the Pru matures in June. With the state of the market to my mind it seems a silly time to be locking into buying an annuity. There are a few "income choice" pensions which while more risky have a potential to grow (or fall) as they invest fund in the stock market. Pru have one and a mutual firm called MAM Advantage.

 

does anyone know anything about this stuff beacuse it is maze..no wonder people tick the box and stick with their long term pension provider rather then the open option of taking it elsewhere *-)

 

any ideas please.....

[Colin Leake]

Given you health problems I would go for a draw down pension rather than annuity. That way if anything happens to you the remainder of the money is still there to be passed on to whoever you chose. If you do go for an annuity then ask for your health problems to be taken into account. This will give you a better annuity return.

 

I have my main pension as a drawdown pension and three others as annuities. Being diabetic enabled me to get better rates.

[Guest pelmetman]

Snap :D....................I've got a Pru pension paying out in June as well although I'm only 55..........I stopped paying into years ago when realised I was wasting my time and money *-)..............its only 30+k but I still intend to take it now even though the rates are so dire,I doubt I can get draw down 8-) ..................why wait 10 years for 2 peanuts, I might as well have 1 peanut now :-S ............at least I should get my Navy pension at 60.......... B-)

[Guest JudgeMental]

Pelmet the whipper snapper:D .....you would be better oft leaving it till 60 I would think, and with annuity rates so poor why now. Pru do an "income choice" pension also, they dont mention it unless you ask. it is on their website

 

Thanks Colin but its not a big enough sum for a draw down scheme I believe....its really opinion re income choice that I'm looking for but as thet are pretty new not much info about them...

 

I will be OK for an "enhanced" pension because of health.

[Guest pelmetman]

JudgeMental - 2013-03-09 6:41 PM

Pelmet the whipper snapper:D .....you would be better oft leaving it till 60 I would think, and with annuity rates so poor why now. Pru do an "income choice" pension also, they dont mention it unless you ask. it is on their website

 

Can't see any point in waiting..........as I reckon the economy will be a basket case for at least another 10 years *-)...........which is why I'm happy to step off the property ladder and go traveling ;-)........might stick the money in premium bonds :D.........

[Guest peter]

I hope you're going to get a propper european motorhome for your permanent travels Dave. Otherwise you could find you have to spend a lot of time camped on a garage forecourt or in a bed and breakfast. (lol)

[Guest pelmetman]

peter - 2013-03-09 8:23 PM

 

I hope you're going to get a propper european motorhome for your permanent travels Dave. Otherwise you could find you have to spend a lot of time camped on a garage forecourt or in a bed and breakfast. (lol)

 

Nowt wrong with Horace 8-)..............he's taken us down to Spain and back 4 times in the last 3 years B-)..........We were perfectly comfortable for 2 months so I don't see why we shouldn't be for 10 months :-S.....

 

As far as I'm concerned based on nearly 22 years experience with the same vehicle.......breakdown free ;-)...........the only times we've had problems is after having work done 8-)........ie my wheel nut saga and when I had the brakes overhauled *-)................both easily sorted ;-)

 

No doubt one day we'll breakdown.........although I believe regular preventive maintenance has delayed it happening so far B-)

[flicka]

hi Judge

I understood that if the "pension pot" is below a certain figure you can take all the proceeds.

 

 

Just can't remember the figure :-(

Maybe a pm to Clive would clarify.

[nowtelse2do]

It was £18k John, that incuded all your pensions so if the total is more, all you can take is 25% of each pension. If you had A/c's I think you could take all that.

 

Dave

[CliveH]

Hi Judge

 

Based on your post I thought you might appreciate some background information on your options for taking benefits but first could I emphasise just how important it is to get it right or at least leave yourself with options as some decisions you could make are irreversible and if made without full knowledge can provide you with the rest of your life to regret.

 

For ease I have simplified things as much as possible:-

 

How to take the benefits?

 

Three options but you can combine all three:-

 

1) Annuity – once set up is irreversible – not thought to be good value currently as interest rates are so low. Can be written on a joint life basis to protect your spouse. No repayment of unused funds to your estate, which means that if you die, your children do not get anything.

 

Annuity rates are at an all time low, partly due to interest rates also being a an all time low, but compounded by the issue of the medical profession enabling us all to live much longer – so the pension “pot” has to be paid out for longer and this also drives down annuity rates.

 

(Note - Age 75 – until recently the rules dictated that you had to purchase an annuity at age 75 – you were given no choice. But this changed 2 years ago and now there is no compulsory annuitisation at age 75. This makes Drawdown and Phased retirement as alternative methods of pension retirement planning far more attractive to many people.)

 

2) Drawdown – very flexible, you can take your tax free cash and leave the remainder in a managed pension arrangement and “draw” from it. There is a maximum upper limit set by the Government Actuarial Department (GAD) and this limit based upon the average annuity rate and for Drawdown plans is called the “GAD Limit”. From March 26th this year, the GAD limit returns to 120% after it was reduced to 100% by the Coalition Government.

 

You can convert a Drawdown “pot” to an annuity at anytime. Drawdown was originally introduced to enable people to allow their pension pots to remain invested, still growing but to take an income from it as well. Thus it enables an individual to have their cake and eat it in some ways especially as annuity rates have been consistently falling such that locking oneself into an irreversible annuity contract was less attractive than simply drawing down on a growing pension fund.

 

On death, the entire Drawdown Pension fund is retained by your spouse, or they can buy an annuity in their name, or they can take cash but only after a whopping 55% tax hit.

 

If your spouse has predeceased you then your estate benefits from this remaining 45% of the fund.

 

3) Phased Retirement. Sometimes an individual has no real need for the 25% Tax Free Cash that is available from a pension and so the Phased option becomes attractive. Here a pension pot is “segmented” and only a few segments are accessed each year rather than all of them.

 

So whereas with an Annuity or Drawdown the Tax free Cash is 25% and the remaining fund either goes into an annuity where there is no payment to your estate on death, or with a Drawdown plan your estate on death receives 45% of the fund after tax, with a Phased Retirement plan, you do not access the 25% Tax free cash in its entirety but “Phase it” over a number of years.

 

 

So if we try to compare the three options it using a pension pot of circa £133K:-

 

This would give 25% Tax Free Cash of c. £33K leaving a £100K pension “pot” that could purchase an annuity or be placed in a Drawdown arrangement (IDD = Income DrawDown) i.e. options 1) and 2).

 

If we assume an annuity rate of 5% (could be more on ill-health grounds) for a 60 year old this £100K gives a taxable income of £5k a year or £4k net of BRT.

 

Drawdown by allowing 120% of GAD (Government Actuarial Department average annuity rate) would allow you to take 6% from your pension pot.

 

However – option 3 – Phased Retirement is proving more popular these days especially where you do not need the Tax Free Cash.

 

Here the £133K remains intact but if you want £5k income in year 1 then rather than having to convert the whole thing to an Annuity or Drawdown you access just £20,000 of it. All pension plans are written in segments or multiple policies to facilitate this.

 

This £20,000 can be placed in an Annuity or a Drawdown – whatever suits you – and you take the 25% tax free cash and used that as your income for year 1.

 

The tax hit is then only on the income that is generated by the £15K in an annuity or IDD. Most people use IDD as annuity rates are so low.

 

So in year 1 the £133K looks like this - £5K in you bank account for “income” - £15K in IDD and £113K still fully invested.

 

The tax benefits overall are considerable as both an annuity and IDD on the whole pot would produce a substantial taxable income. But via Phased Retirement the only taxable income is that generated from the £15K. If you chose IDD for this £15K and take no income – then BINGO! – no tax either!! This can be very beneficial if you have other taxable investments whose tax efficiency can be enhanced if you can reduce your taxable income.

 

So in summary – the annuity route is the safest in that it gives a guaranteed income but you lose ALL your capital

 

IDD allows you to have the TFC and a slightly higher income than an annuity and the fund is still yours to manage. A huge advantage is that on death your spouse takes over the whole this as it is and they can either carry on as before, purchase an annuity or take 45% of the fund with the taxman taking the other 55%.

 

Phased retirement however has not only the considerable advantage to you of the most tax efficient way of accessing your pension pot but ALSO your family potentially benefits from the fact that much of the pension pot remains intact for longer. If we look at year 1:-

 

The £133K looks like this –

£5K in you bank account for “income” – No income tax paid on this.

 

£15K in IDD – If income taken income tax is laible but zero income can be selected. On death 55% recovery tax applied so 45% return of fund to your estate.

 

£103K still fully invested – Full return of fund to your spouse or beneficiaries on death. This fund can be written in trust so it falls outside of your estate for IHT purposes.

 

What happens in year 2? – and each subsequent year?

 

You can take another slice of the non-vested “pot” which has hopefully grown a bit in the previous year. So you could move another £20K from the £113+ “pot” and put it into Drawdown (or an annuity) if we assume no growth at all in the year then at the end of year 2 the original £133K looks like this:-

 

Two lots of £5K = £10K “income” taken as TFC.

 

Two lots of £15K = £30K in the IDD account (55% tax hit on death) – no income tax charged if zero income taken.

 

£93K in the “non vested” pot (Full return of Fund on death)

 

 

In subsequent years we usually recommend a chunk of income taken from the accrued Drawdown account thereby allowing the Non vested “pot” to benefit from the growth accrued.

 

Summary

 

Annuities are the safest option – but even ill-health annuities are very poor value. The average lifespan is now 79.9 years. With todays low annuity rates you have to live longer than your life expectancy to get paid all that you have accrued in your pension pot.

 

Hence IDD and Phased being far more popular options.

 

If you do not need all your TFC then Phased is by far the best option regarding tax efficiency.

 

Hope this helps.

 

If anyone wants more specific input please PM me.

 

[Guest pelmetman]

Can I take a 30k pot as draw down Clive?

[Guest JudgeMental]

Thanks Clive very useful..But my fund not that big and I "thought" the way things work, draw down only suitable for rich folk :-D

 

So you dont have any thoughts regards "income choce" vehicles from the likes of Pru amd MAM? as that was what I was looking for an opinion on to be honest..aware already that not the best time to buy an annuity as they are at an all time low. and locking into one forever seems daft.

 

was looking forward to the lump sum *-) for some splash the cash fun money :-S As it seems whenever we got any lump sums in the past the wife spends it :-( BUT! if it makes sense not to take it so be it....

 

do you want to do the math with a notional 100k fund, as this usually quoted when I look on line...

 

Thanks again your input very much appreciated...

[CliveH]

Hi Dave - yes you can but some of the better Drawdown providers have minimum investment levels. Usually 50K after the TFC has been taken - so the minimum size of fund where we could look at the "whole of the market" would be circa £67K.

 

Also - we would suggest that as some of the set up charges are on a fixed fee basis and so the smaller the fund the less acceptable the charge is when expressed as a percentage.

 

But please do not think this applies to IDD alone!! :-S - The annuity rate for smaller funds reduces dramatically because the fixed set up fee is taken out before the rate is calculated. The difference is simply that an annuity provider does not have to tell you what the set up charges are. You simply get an annuity rate and you obviously chose the best rate.

 

But because the IDD plans are invested contracts, the FSA states that the set up charges must be clearly stated. No doubt about it that an IDD contract has an AMC (annual management charge) whereas and annuity does not - but the initial set up charges for annuities can be horrendous.

 

I think one of the papers had a report on this recently - I have not read it yet - but it may be worth looking it up. If I can find the link I will post it.

 

Update:-

 

I cannot find the MSM link - but from memory it was a lightweight cover of what is actually happening. The background is better covered here:-

 

http://www.pensions-insight.co.uk/high-expectations-for-annuities-investigation/1470729.article

 

Update 2 :-

 

Whilst i think this article is more than a tad simplistic -

 

http://www.telegraph.co.uk/finance/personalfinance/pensions/9795687/Annuity-rates-to-rise-by-25pc.html

 

It does emphasise the fact that due to low interest rates and Gilt/Government Bond yields annuity rates are very, very poor value! :-S

 

So as a rule of thumb - anyone buying an annuity now will be locking themselves into those low rates for the rest of their lives!!!

 

Hence the popularity of IDD and Phasing whereby you can keep the pension "pot" still invested whilst still taking an income so that if and when annuity rates improve you can purchase an annuity later when rates are higher.

 

It makes no sense whatsoever to buy an annuity now when we could see a substantial increase in annuity rates in the coming years. 8-)

 

 

[Guest JudgeMental]

dont worry fully aware that buying an annuity right now bonkers :-D

[Guest pelmetman]

How about an investment linked annuity Clive? :-S

 

 

These figures are based on a range of Anticipated Bonus Rates (ABR) or Required Smoothed Return Rates (RSR). With Legal and General only, any Protected Rights funds are quoted as a conventional annuity.

 

An investment linked annuity does have an element of risk involved in that the annuity income can go up or down. We can also discuss this in detail with you, should you be interested in this option.

 

If you are not sure whether you have any protected rights within your fund, please check with your pension provider(s), as incorrect information will impact on your annual income and invalidate your investment linked quote.

 

Please note that we only provide quotations on with profits annuities. If you are interested in a unit linked annuity, we recommend that you contact your financial adviser.

Benefits:

• Possibility for steady growth.

• Possible protection against the effects of inflation.

• Can be converted to a conventional annuity with the same provider any time after the first policy anniversary.

• Poor investment performance may lead to reduced income, but never below the minimum income guarantee or secure level.

• Payments are guaranteed for the first 12 months and the ABR or Required Smoothed Rate (RSR) can be reviewed on each policy anniversary.

Risk factors:

• The rate of future bonuses or smoothed returns cannot be guaranteed.

• Poor investment performance may lead to reduced income, but never below the minimum income guarantee or secure level.

• Annual changes in income may make it difficult to budget.

• Past performance is no guarantee of future performance.

 

[Guest JudgeMental]

you can take your pension anywhere on maturity to max the value, you dont have to stay with provider you have been saving with. over the long term (a bit like property) market tends to grow..so whats the point of locking into an annuity when they are at an all time low. Taking the OMO (open market option) you can always lock into an annuity when (and if *-)) the market improves. But if your risk adverse, maybe not right for you....